Market opening: Markets could open lower on profit taking after yesterday's rally, as investors eye the ongoing Greek debt talks. The FTSE futures were trading 31 points down at 7.00 am UK time.
New York: Lower home sales in December, highlighting the fragility of a recovery in the housing market, and a slower-than-expected rise in leading economic indicators weighed on markets. The S&P 500 closed 0.6% lower yesterday.
Asia: Markets paused to evaluate the sustainability of yesterday's rally. The Nikkei closed 0.1% lower while the Hang Seng was trading at +0.2% at 7.00 am UK time.
Continental Europe: Markets surged on the US Fed's assurance to keep rates low for longer, better-than-expected German consumer confidence and reports of progress on Greece's debt talks. The German DAX and the French CAC 40 closed 1.8% and 1.5% higher, respectively.
UK small caps: The FTSE AIM All-Share index ended 1.2% higher yesterday.
Additional public sector contribution to Greece's bailout fund
Greece's private lenders are demanding public lenders, including the European Central Bank (ECB), take part in Athens' debt restructuring deal. ECB holds Greek bonds worth £40bn, and a haircut could mean that the £130bn bailout package may prove insufficient. European Union (EU)'s Economic and Monetary Affairs Commissioner Olli Rehn told Reuters that public sector contribution to Greece's bailout fund may need to be increased, though such an increase is not expected to be dramatic, thereby echoing the International Monetary Fund (IMF)'s thoughts. Athens and the Institute of International Finance (representing private lenders) said that discussions were heading in the right direction, but refrained from disclosing further details. Talks on legal and technical issues of the bond swap deal would continue today and are likely to extend until Saturday.
Anglo American released a production update for Q4 2011 ended 31st December 2011 yesterday. Production of Platinum declined 19% y-o-y to 710,000 ounces and equivalent refined Platinum production decreased 9% to 583,200 ounces. Government ordered 32 safety stoppages in Q4 2011 compared to 14 in Q4 2010 and 16 during Q3 2011, which led to lower mine production. Production of diamonds declined 24% y-o-y to 6.5m carats as the company carried out scheduled maintenance work at the Debswana and DBCM operations. Production of iron ore increased 5% y-o-y 12.4m tonnes as the Kolomela mine in South Africa became operational and efficiency improved at the Amapa mine in Brazil. Production of metallurgical coal and thermal coal increased 4% y-o-y to 4.1m tonnes and 5% y-o-y to 8.6m tonnes respectively. The commissioning of the Los Bronces in Chile boosted copper. Ramping up of operations in the Barro Alto mine in Brazil helped nickel production increase 52% q-o-q and 125% y-o-y to 9,900 tonnes.
Our view: About 30% of mining accidents occur in the Platinum industry, the South African Department of Mineral Resources estimates. Stoppages due to safety inspections are an industry wide phenomenon. Consequently, global Platinum production has declined, which could support Platinum prices. Stronger Platinum prices could tilt the scale in Anglo-American's favour. With Anglo's diversified mining operations and the high quality of their assets we retain our buy recommendation.
In an update yesterday, Lonmin reported a 3.7% drop in total tonnes mined in the last quarter of 2011. A total of 2,892,000 tonnes was mined in Q4 2011 compared to 2,963,000 in 2010. The amount of metal processed declined to 3,023,000 tonnes in 2011 from 3,048,000 tonnes in 2010. Platinum sales increased nearly 40% y-o-y in 2011 while total Platinum group metals sales were up 2.9%.
Our view: The company has maintained full-year production targets. However, we believe Anglo American's scale better positions it to deal with the ongoing challenges in Platinum mining sector. Furthermore, Lonmin has indicated that costs will rise as it settled with its worker unions for an 8.5% hike in wages in 2012 and 2013. Anglo American is our preferred company in this sector and we keep our hold recommendation on Lonmin unchanged.
Kazakhstan-based miner Kazakhmys released a production update for Q4 2011 and FY 2011 ended 31st December 2011 yesterday. Copper production declined 1.6% y-o-y to 299,000 tonnes but was in-line with guidance of 300,000 tonnes. Output of silver increased to 13m ounces, and that of gold increased 151,000 ounces. The production of zinc declined to 139,600 tonnes from 167,300 tonnes in 2010. Power generation increased 15% y-o-y and average tariff released increased 20% y-o-y.
Our view: The company is keeping up with copper production despite declining copper grades by increasing mined ore. Two other copper projects at Aktogay and Bozshakol are expected to start production only after 2015. Also, the management expects demand for copper, which was earlier split equally between Europe and China, to tilt towards China. Though the Chinese economy is feeling the pinch from the global slowdown, manufacturing activity in China has been resilient. We expect Chinese demand to support the company's growth, and upgrade the stock to hold from sell.
Petropavlovsk, the Russia-focused gold mining and exploration company, released 2011 production figures and 2012 guidance yesterday. The company produced 630,100 ounces of gold during 2011, exceeding its forecast for 600,000 oz. The production growth was driven by a 56% rise in volumes at its flagship Pioneer mine. The management has guided for 11% rise in 2012 gold output at 680,000 ounces.
Our view: Gold mining companies have benefitted from the compounding increase in gold prices. With the uncertainty surrounding the global economic situation, perceived safe haven assets like gold will continue to be in demand. The ramp-up in production at Petropavlovsk's Pioneer mine benefits from this high-price environment. We expect earnings to increase and reiterate our buy recommendation.
EasyJet released a trading update for Q1 2012 ended 31st December 2011 yesterday. Revenues increased 16.7% y-o-y to £763m. The company benefitted from improved revenue per seat (+7.7%) and positive movements in the Swiss Franc. Good weather conditions helped the company fly 6.9% more seats in Q1 2012. On an underlying basis, seats flown increased 2.8%. The number of passengers carried increased 8.1% to 12.9m and the load factor, which indicates the utilisation of seat per aircraft, increased 0.9%. Management informed that about 70% of the seats for the H1 2012 have been booked, and the airline will be able to recoup most of the increase in fuel prices from the increase in revenue per seat and limit H1 2012 losses to between £140m - £160m similar to H1 2011 losses of £153m.
Our view: The aviation sector is facing dual challenges of rising fuel costs and decreasing consumer spending. The air passenger duty is expected to further deter consumers from air travel. We recommend a selective approach to investments in this sector and maintain the hold on EasyJet.
International private equity firm, 3i, said deterioration in the macroeconomic outlook and uncertainty has adversely impacted parts of its portfolio's during the three months ended 31 December 2011. Total investment in the nine months ended 31 December 2011 increased to £530m compared to £510m in the prior year period. Net debt fell by £136m to £395m by the end of 2011. Michael Queen, 3i's Chief Executive, highlighted the strategic steps of reorganising the private equity business, making a foray into Brazil, and the launch of 3i's Credit Opportunities Fund.
Euromoney saw its stock price decline yesterday after it released numbers for the quarter ended December 2011. The B2B data and publishing firm's total revenues increased 11% y-o-y during the period. However, the higher uncertainty in financial markets led to a weakening in advertising sales and sponsorship. During the last three months of 2011 advertising revenue declined 13% y-o-y. Overall subscriptions rose 26% y-o-y, and subscriptions now account for 50% of the top-line, sponsorship by 2% and delegates (at conferences) by 10%. Net debt at December 31, 2011 was £104.8 million, a reduction of £14.4 million since the firm's financial year-end in September. The company warned that the Q2 FY2012 revenue outlook has worsened as worries persist over the Eurozone and global growth.
Financial software provider, Misys released interim results yesterday. The trend of customers from Western Europe deferring orders and growth being increasingly sourced from Asia, Eastern Europe and Middle East & Africa continued. Order intake during the six months to November 2011 increased 33% primarily due the acquisition of Sophis. On a pro-forma constant currency (PFCC) basis, orders grew only 3% y-o-y. Revenue grew 1.4% y-o-y on a PFCC basis to £197m. Underlying operating profit declined 9.4% due to increased investments in new solutions. The company reported a loss before tax of £3.6m compared to a profit of £18.8m during the prior year period.
German Consumer confidence
German consumer confidence is forecasted to rise in February to 5.9 from a revised 5.7 in January, GfK estimates. The measure of economic expectations increased to 7.5 in January from -0.9 in December. The index of income expectations rose to 34.1 from 34 in the previous month and the gauge of consumers' willingness to spend climbed to 41.8 from 27.4 in December.
Our view: Falling unemployment in Germany has encouraged households to spend and has helped in raising their economic expectations despite a festering debt crisis in the Eurozone. Increasing consumer confidence bodes well for the German economy. In the face of weaker exports, domestic demand could support growth and could save Germany from a recession in 2012.
US durable goods
Orders for durable goods increased 3% m-o-m in December following a rise of 4.3% in November, the US Department of Commerce said yesterday. Strong demand for aircrafts boosted orders. Even without transport, new orders increased 2.1%.
Our view: The orders for durable goods increased more than the expected 2.0% indicating that business investment in the US picked up in December and suggests that the manufacturing sector is gaining momentum. The sector should receive a boost from the low interest rate environment and rising confidence levels. And the US recovery would be strengthened if the pick-up in manufacturing and consumer spending percolates to faster job creation.
US leading indicators
The Leading Economic Index increased 0.4% in December following a 0.2% rise in November, the Conference Board said yesterday. It is a composite index designed to forecast trends in the overall economy. The index is based on 10 key indicators known to precede changes in the economy.
Our view: Although this is the third consecutive increase in the composite index, it was lower than the estimate of 0.7% rise. An increase in the index suggests the US economy will continue expanding driven by higher manufacturing activity and consumer spending.